A focus on long-term fundamentals and in-depth research helped Franklin Templeton Investments exploit volatility caused by the jittery market in 2011 for the Templeton Global Total Return Fund and explore sound long-term opportunities for the Templeton Asian Growth Fund.
BM: You have an aggressive exposure to China (including HK) at the moment. Most said China has soft-landed. Do you agree with that statement, and where do we find the main drivers for growth in 2012?
Mark Mobius (MM): Gross domestic product (GDP) growth in China eased from 9.1% year-over-year (y/y) in the third quarter of 2011 to 8.9% y/y in the fourth quarter. This brought the full-year 2011 growth rate to 9.2% y/y, compared to 10.4% y/y for 2010. The main reasons for the slowdown were weakness in export growth and the implementation of tightening measures to curb inflationary pressures and overheating in the real estate sector. Going forward, we expect the global economy to witness varying degrees of recovery in the coming years. Asian economies, including are likely to continue having strong growth rates. In addition, the International Monetary Fund forecasts China to grow by 8.2% in 2012 and 8.8% in 2013.
Our investment strategy employs a bottomup, long-term approach based on analyzing companies’ fundamentals. Generally speaking, we believe the earnings growth outlook for consumer-oriented Chinese stocks remains positive.
The selection of any particular segment of the consumer space really depends on the metrics of the individual company whether it is a department store or a wine producer. There are a number of Chinese companies in those sectors and we have a few of them in our portfolios. Signs of an increasingly consumerist society are readily evident. China has become the world’s largest automotive market with annual sales of 18 million compared to 13 million for the US.
Commodity stocks continue to look good because we expect the global demand for commodities to continue its long-term growth. In China, the oil & gas companies should continue to benefit from rising consumption while the coal mining companies should benefit from industry consolidation and the supply tightness in the international market.
Consumer stocks are also favored. Specifically, we are more in favor of brand owners with strong market positions.
What is there for Thailand after reaching historic trading highs last year, and what does its overall corporate earnings and valuations look like?
MM: In January, the Thai market participated in the Asian rally, helped by increasing optimism on local and global economic prospects and hopes of recovery from the effects of the October floods.
Taking a five-year view, we expect Thailand’s equity market could perform well. Banks are a good pick for us in emerging markets such as Thailand because there is the consumption story and a lot of the population still doesn’t have access to the banking system In fact, we have 10 percent of our total emerging market money in Thailand, and continue to remain a firm believer in the Thai market.
BM: The fund targets stocks that offer good potential for long-term growth with “blue chips” forming only part of the portfolio. Please help us understand your selection and monitoring process and what are some disciplines you follow?
MM: Our time-test investment philosophy and process have enabled us to seek the best long-term risk-adjusted opportunities for our investors. We use the same bottom-up, long-term value approach instituted by Sir John Templeton more than 60 years ago. Our investment methodology is highly disciplined. While we have adhered to our single objective of achieving superior returns entirely through stock selection, other elements of the investment process such as top-down market forecasting, economic projections, currency forecasting and asset allocation do not drive investment decisions but are used to support the bottom-up process.
Another key feature of our unique investment approach is our practice of making on-site visits to companies. Being on the ground is an integral part of our investment philosophy. The direct first-hand information provides the benefit of a timely understanding of emerging markets stocks. Dr. Mobius and his team have conducted more than 23,000 company visits in the last 20 years to “kick the tires” and find the most attractive investments. Hands-on research is essential to our process by giving the team insights into opportunities and risks that might otherwise not be readily apparent.
We do not construct portfolios to match the characteristics of any specific benchmark, and this approach drives our process to uncover opportunities wherever they may exist.
BM: How do you view the potential of North Asia compared to Southeast Asia in 2011?
MM: Within north Asia, just as in China and other Asian countries, growth in the South Korean economy is likely to outpace more mature developed economies as the latter continues to absorb the costs of recent excesses in the financial sector, combined with potential declines in productivity. The latest forecasts from the International Monetary Fund project that advanced economies will achieve GDP growth of only 1.2% in 2012 and 1.9% in 2013, compared to projected growth of 3.9% and 4.4%, respectively, for South Korea. The country’s growth could arise both from trade with dynamically growing countries elsewhere in Asia and from continued strong domestic demand.
Southeast Asia‘s exports as a percentage of the total from the emerging markets to the EU and the US, have been declining and ASEAN is now the largest trading partner with China. Thailand is amongst the top picks in Southeast Asia for us. We also like Indonesia, as it has had a good run over the past few years and believe it still has potential to move forward.
BM: What is your house view about how long will the global low interest rate environment last? What are the countries likely to be affected by any interest rate upward pressure?
Dr. Michael Hasenstab (MH): We generally believe that current levels of interest rates do not represent good value. We continue to see the unorthodox monetary policy being followed in some major advanced countries as having potentially serious long-term consequences, including asset price bubbles in emerging markets and upward surges in global commodity prices. We have continued to position ourselves in seeking to manage the interest-rate risks that we expect from the combination o
f historically low interest rates and easy monetary policy in the G-3, rising price pressures emanating from China and global demand that we believe is far from collapsing.
BM: How will the European sovereignty debt crisis affect the currency market this year?
MH: Greek headlines have been dominating markets for some time now. Regardless of how the ultimate resolution for Greece plays out, we believe a strong ring fence has been created to prevent major contagion. A handful of factors provide this ring fence: (1) the recently adopted and very prudent fiscal packages in Spain and Italy help stabilize their respective long term debt dynamics, (2) new proposals for major labor reform and deregulation in Spain and Italy should help support long term growth in these countries, (3) the ECB’s LTRO operations equate to a massive quantitative easing (QE) that will directly support liquidity in both the banking and government markets, and (4) the largest Eurozone countries of Germany, France, Italy and Spain remain committed to moving toward a more concrete fiscal union supported by binding fiscal parameters.
BM: Can you share with us your strategies for 2011 and your positioning for the first half of 2012?
MH: A focus on long term fundamentals and patience positioned the Templeton Global Total Return fund to exploit investment opportunities created by the volatility and panic during the second half of 2011. This focus on fundamentals motivated our positioning to: (1) remain overweight Asia,Scandinavia, and parts of Central Europe and Latin American, (2) remain underweight the USD, Euro, Yen and (3) remain underweight interest rate risk. Recently, we have benefited from positions we accumulated at depressed levels during the panic of the second half of 2011 as some of these markets began to normalize, like Ireland and several Asian and Central European countries. BM